WORKING

 PAPER  
ITLS-­‐WP-­‐13-­‐01  
Confidence  intervals  of  willingness-­‐to-­‐pay  
for  random  coefficient  logit  models.  

 
 
By  
Michiel  C.J. Bliemer  and  John  M.  Rose  
 
 

 
 
 
January  2013  
 
 
ISSN  1832-­‐570X  

INSTITUTE  of  TRANSPORT  and  

LOGISTICS  STUDIES  
The  Australian  Key  Centre  in  
Transport  and  Logistics  Management  
 
The  University  of  Sydney  
Established  under  the  Australian  Research  Council’s  Key  Centre  Program.  
NUMBER: Working Paper ITLS-WP-13-01

TITLE: Confidence intervals of willingness-to-pay for

random coefficient logit models.

ABSTRACT: Random coefficient logit (RCL) models containing random

parameters are increasingly used for modelling travel
choices. Willingness-to-pay (WTP) measures, such as the
value of travel time savings (VTTS) are, in the case of such
RCL models, ratios of random parameters. In this paper we
apply the Delta method to compute the confidence intervals
of such WTP measures, taking into account the variance-
covariance matrix of the estimates of the distributional
parameters. Compared to simulation methods such as
proposed by Krinsky and Robb, the Delta method is able to
avoid some of the simulations by deriving partly analytical
expressions for the standard errors. Examples of such
computations are shown for different combinations of
random distributions.

KEY WORDS: Willingness-to-pay, confidence intervals, random coefficient

logit, Delta method.

AUTHORS: Bliemer and Rose

Acknowledgements: The authors are grateful for the private discussions on this
topic with Bill Greene and Stephane Hess. Also, we would
like to thank David Hensher for his comments on an early
draft of this paper. Of course, only the authors can be
blamed for possible surviving errors.

CONTACT: INSTITUTE of TRANSPORT and LOGISTICS STUDIES (C13)

The Australian Key Centre in Transport and Logistics Management

The University of Sydney NSW 2006 Australia

Telephone: +612 9351 0071

Facsimile: +612 9351 0088
E-mail: [Link]@[Link]
Internet: [Link]

DATE: January 2013

 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

1. Introduction
Discrete choice models are now widely applied to predict market shares, compute elasticities, or
to derive willingness-to-pay (WTP) measures. To this end, stated preference or revealed
preference data is collected and assuming random utility theory, parameters of the utility
functions are estimated. While the traditional conditional logit model (or often referred to as the
multinomial logit (MNL) model) proposed by McFadden (1974) is still widely used, in the last
decade there has been a clear shift towards the more general mixed multinomial logit (MMNL)
model, also commonly referred to as the random coefficients logit (RCL) model, that can handle
more complex error component structures, can describe heterogeneous behaviour by means of
random parameters, and can take panel effects into account (see McFadden and Train, 2000).
Having random instead of fixed coefficients, the WTP is no longer a fixed value but rather
represented by a random distribution as well.
In order to determine the reliability of the parameter estimates and resulting confidence
intervals, standard errors play an important role. These standard errors are obtained from the
(asymptotic) variance-covariance matrix, which is related to the second derivatives (curvature)
of the estimated models log-likelihood function, and commonly reported in most standard
estimation software. As the parameter estimates maximize the log-likelihood function, the
higher the curvature of this function at the top, the more reliable these parameter estimates,
hence the lower the standard errors on average. Since each parameter is not known with
certainty but rather has some confidence interval, the WTP – which is typically defined as the
ratio of two parameters – also has an associated confidence interval.
Several methods exist for computing the standard error of a function of parameter estimates. For
example, Krinsky and Robb (1986, 1990) proposed a procedure for using the variance-
covariance matrix in simulating a confidence interval for elasticities which has since been
adapted for calculating the confidence intervals for WTP. This procedure involves the use of
Monte Carlo simulation in at least two dimensions (see Haab and McConnell, 2003, for more
detail). An analytical method for determining the standard error for the WTP ratio is the Delta
method. Using the first derivatives of the ratio function, the standard error can be found without
relying on simulation methods. The Krinsky and Robb and the Delta method have been applied
to ratios of parameter estimates of the MNL model. Without referring to the Krinsky and Robb
method, Ettema et al. (1997) proposed an identical simulation method, which was applied in
Espino et al. (2006). The other main simulation approach for obtaining confidence intervals that
has been applied in the literature is the use of bootstrapping (see e.g., Armstrong et al., 2001).
Armstrong et al. (2001) also provides an alternative but more complex simulation approach.
Recently, Daly et al. (2012a) argued that under certain assumptions, for such a ratio the Delta
method provides an exact expression for the standard error of WTP estimates. Simulation
approaches merely offer an approximation of the confidence intervals.
Whilst most research effort has focused on obtaining the standard errors for the ratio of
parameters within the MNL model framework, determining the standard errors for ratios of
random parameters in the RCL model has become more important given that this model is now
becoming more mainstream. Determining these standard errors and the resulting confidence
intervals for the ratio of two distributions however is not trivial.
To illustrate the complication of determining the standard errors for WTP measures within the
RCL model framework, consider the case of the ratio of the travel time parameter and the cost
parameter, yielding a value that is often in the literature referred to as the value of travel time
savings (VTTS), an important WTP measure in the transportation field. Suppose that the travel
time parameter is normally distributed, and the cost parameter lognormally distributed such that
it is always negative. According to Daly et al. (2012b), such a WTP would have a finite mean
and variance. In estimation, we have to find values of the distributional parameters, namely the
mean and standard deviation of the normally distributed travel time parameter, and the mean

1
Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

and standard deviation of the lognormally distributed cost parameter. Each of these four
parameters has associated standard errors describing its uncertainty. Hence, there is uncertainty
about the mean of the normal distribution, uncertainty about the standard deviation of the
normal distribution, as well as uncertainty about the mean and standard deviation of the
lognormal distribution. Furthermore, there are covariances describing the correlations between
the parameter estimates. When we compute the WTP ratio between the two parameters, these
uncertainties translate into uncertainty of the standard error of the WTP. Clearly, the entire
variance-covariance matrix plays a role in determining this uncertainty. Therefore, it may be
tempting to simply simulate the WTP ratio by drawing different values for each distribution of
the coefficients, compute the ratio, and compute the interval in which 95 percent of the resulting
values fall, as done for example in Campbell (2007). However, such a procedure does not take
the variance-covariance matrix with the uncertainties in the parameter estimates into account,
and is therefore not a valid procedure.
The Krinsky and Robb procedure could be applied by taking simulated draws for each of the
estimated four structural parameters, which then results in a normal distribution and a lognormal
distribution. From these two distributions, we could again take simulated draws and compute
the ratios. Therefore, the equivalent Krinsky and Robb procedure for the WTP in an RCL model
would involve a Monte Carlo simulation in six dimensions. Such a procedure is proposed in
Hensher and Greene (2003) and applied in Sillano and Ortúzar (2005) and Michaud et al. (in
press). The procedure in Armstrong et al. (2001) has been applied to random coefficient models
by Amador et al. (2005). As far as we are aware, the Delta method has never been applied to
obtain confidence intervals for the WTP in RCL models.
In this paper we propose to apply the Delta method for determining the standard error of the
WTP ratio of two randomly distributed parameters, which can be used to compute confidence
intervals. The main reason for preferring the Delta method over the Krinsky and Robb
procedure is that the Delta method requires less simulation. To compare, the Krinsky and Robb
procedure would require simulation of six random variables, while the Delta method would
require simulation over only two random variables as will become clear later in this paper.
Although the theorem in Daly et al. (2012a) is very powerful, the claim that the Delta method
provides exact standard errors for the WTP in the case of fixed coefficients likely does not
generalise to the ratio of any two random coefficients, as in general some simulation is needed
(as the case in this paper), which may violate the assumption of an invertible function in the
theorem. In the special case of a ratio of two lognormal distributions, the resulting distribution is
again lognormal, such that the analytical results in Daly et al. (2012a) can be used.
The remainder of the paper is structured as follows. In Section 2 a brief introduction into
discrete choice models and WTP is given, which mainly serves to introduce the necessary
mathematical notation. Section 3 reviews how to compute the confidence intervals for WTPs in
the MNL model using the Delta method. Section 4 presents the main contribution of the paper,
namely applying the Delta method in case of the RCL model, both for independently and
dependently randomly distributed parameters. To illustrate the method, four examples are given
in Section 5. Section 6 concludes with a discussion.

2. Parameter estimation and WTP

Consider the usual utility function formulation in which the utility of alternative j, U j , consists
of a systematic utility part, V j , and an unobserved part,  j ,

U j  Vj   j, (1)

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

where the systematic part is given by a (linear or nonlinear) function g j of some known
attribute levels for that alternative, x j , and a vector of K unknown parameters,  ,

V j  g j ( x j |  ). (2)

Often, a linear function is assumed, such that

V j    k x jk . (3)
k

We assume that the unobserved components  j are independently and identically extreme value
type 1 (EV1) distributed, such that the probability of choosing a certain alternative is expressed
by a logit type model.
The unknown parameters, also called coefficients (and used interchangeably in this paper),
describing the preferences of agents under study, are to be estimated by observing (stated or
revealed) choices of the agents in some choice situations. If the agents are assumed to be
homogeneous, these parameters are constant over all agents, such that fixed parameters are
estimated. In contrast, whenever agents are assumed to be heterogeneous (i.e., different
preferences), then typically random parameters with distributions are estimated for the whole
population of agents. For example, one could estimate a fixed parameter  k which has a single
value, or instead estimate a distribution in which the structural parameters are to be estimated
(e.g., mean  k and standard deviation  k in case  k is assumed to follow a normal
distribution). In case of homogeneous agents, the MNL model is considered, while with agents
with heterogeneous preferences, the RCL model results (either cross-sectional or panel).

Let ˆ denote the vector of (maximum likelihood) estimates for the unknown parameters.
According to McFadden (1974), these parameters will be asymptotically normally distributed
with a mean corresponding to the true parameter values,  , and a variance-covariance matrix,
  , equal to the negative inverse of the Fisher information matrix,

D
ˆ  N (  ,   ). (4)

The asymptotic variance-covariance matrix,   , together with the parameter estimates, ˆ , is a

typical side-product of estimation software such as Alogit, Biogeme, or Nlogit. The roots of the
diagonal elements of this matrix denote the (asymptotic) standard errors. These standard errors
denote how reliable the parameter estimates are, yielding t-ratios to test the null hypothesis of
the parameter estimates.
Instead of the values of  themselves, one is often more interested in ratios of these
parameters. WTP is a special case in which the denominator is the cost parameter. In case of a
utility function that is linear in the parameters and linear in the attributes (as in Eqn. (3)), we
define the WTP of attribute k as

k
wk  , (5)
c

where  k is the parameter for attribute k and  c is the cost parameter. In the more general case
of a nonlinear utility function, the WTP of attribute k is defined as

3
Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

g j / x jk
wk  . (6)
g j / x jc

The theory in this paper will be valid for the general nonlinear case, however, we will focus on
the most widely assumed case of linear utility functions.
Since both  k and  c are both known but with uncertainty, there is also exists uncertainty
about wk . An interesting question then is, what is the standard error of wk or alternatively, what
is the confidence interval of wk ? The next section first discusses how this has been solved in the
literature for the case of fixed parameters in the MNL model. Then we show how to determine
these confidence intervals in the case of random parameters in RCL models, which is the main
contribution of this paper.

3. Confidence intervals for WTP in the MNL model

The Delta method can be applied to determine the variance of a ratio of parameter estimates. In
fact, the Delta method can be applied in general for any function of the parameters. This method
states that, if ˆ is asymptotically distributed as mentioned in Eqn. (4), then a function h( ˆ ) is
asymptotically normally distributed with a mean of h(  ) and a variance of
  h(  )T     h(  ),

h( ˆ )  N  ,   h(  )T     h(  ) ,
D
(7)

where   h(  ) denotes the Jacobian of h (  ). In case of wk  h(  k ,  c )   k /  c , this yields

  1 T  1  
    
D
   var( k ) cov( k ,  c )   c  
wˆ k  N   ,  c    ,
 k  
(8)
  k   cov( k ,  c ) var(  ) 
  2  c
   2  
  c   c 
 

which simplifies to


 .
D
1
wˆ k  N   , 2 var( k )  2wk cov( k ,  c )  wk2 var( c ) (9)
 c 

Therefore, the asymptotic standard error of the WTP is

1
se( wˆ k )  var( k )  2 wk cov(  k ,  c )  wk2 var( c ) , (10)
c

which is the same formula as derived in for example Scarpa and Rose (2008) and Daly et al.
(2012a). Using the parameter estimates ˆk and ˆc as the true parameters and using the
corresponding elements in the asymptotic variance-covariance matrix (both provided by the
estimation software), this standard error can be analytically computed.

4
 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

This derivation holds in the case of fixed coefficients. With random coefficients estimated in a
RCL model the same Delta method can be applied, realizing that  represents a probability
distribution in which the distributional parameters are estimated with some uncertainty.

4. Confidence intervals for WTP in the RCL model

In case of random parameters, parameters  k follow certain distributions. These distributions
are described by parameters themselves, which have to be estimated and therefore have some
degree of uncertainty. Hence, there is uncertainty about the exact shape of the distribution. Let
us first of all assume that the distributions of these parameters are independent. Later we will
consider the case in which  describes a vector of dependent normally distributed parameters.

4.1. Case I: Independently distributed random parameters

Let each  k follow a probability distribution with (a vector of) parameters  k . Let us also
assume that the cost parameter  c can follow such a distribution. Estimating these
distributional parameters in the RCL model will yield parameter estimates ˆk . The trick is to
map the standard errors (and covariances) of the structural parameter estimates ˆk to a standard
error of  k as well as to determine the standard error of  k /  c . The answer lies in rewriting
the parameters  k and  c into functions of  k and  c using parameter-free distributions (such
as the standard normal or the standard uniform distribution). These functions can then be used
within the Delta method.
Let us first write the parameters in terms of the distributional parameters and a parameter-free
distribution:

 k   k ( z k |  k ), (11)

where zk is a standard probability distribution (or in some cases, a vector of standard

probability distributions). For example, in order to describe a normal distribution, N (  k ,  k2 ),
we can write  k   k   k z k , where zk follows a standard normal distribution, N (0,1). Table
1 provides a (non-exhaustive) list of other probability distributions which can be derived from a
standard normal or uniform distribution. The table also contains the first derivatives (Jacobians)
of  to the distributional parameter(s) and standard distributed random variable(s) z, which we
will need later in applying the Delta method.
The WTP can be written as

 k ( zk |  k )
wk ( z k , z c |  k , c )  . (12)
 c ( zc |  c )

Note that since the parameters are distributions, the WTP will also be a distribution.

5
Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

Table 1: Different parameter distributions

Standard
Distribution  (z |  ) distributio   z 
n
Normal

1
 ( z |  ,  )    z z  N (0,1)   
 z


Lognormal

 
 ( z |  ,  )  exp(   z ) z  N (0,1)   
  z 

e
Uniform

1  z 
 ( z | a, b)  a  (b  a ) z z  U (0,1)   ba
 z 
a b

Exponential

 ln z  1
 (z | )   z  U (0,1)  
  z

Triangular  z z  ba
z1  U (0,1) 1  1 2   2 
z1  z2 2
 ( z | a, b)  a  (b  a )    
2  z1  z2  ba
z2  U (0,1)    
a b  2   2 

First, let us focus on the WTP for a specific value (draw) of ( zk , zc ). Suppose that  k and c
have pk and pc elements, and that zk and zc have sk and sc elements, respectively.
Applying the Delta method, we arrive at

   wk T   k wk  
  k   
D    wk    0   c wk  
wˆ k ( zk , zc )  N  wk ,  c    kc  ,
diag(1, ,1)   zk wk  
(13)
   zk wk   0  
   z wk    z wk  
  c   c 

6
 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

in which  k wk  R and c wk  R are the Jacobians of the WTP to  k and  c ,

pk pc

respectively, evaluated in the true values of the parameters,  zk wk  R and  zc wk  R

sk sc
are
the Jacobian of the WTP to zk and zc , respectively,  kc is the submatrix of the variances and
covariances of distributional parameters  k and  c , 0  R ( pk  pc )( sk  sc ) is a matrix with zeros,
( s  s )( s  s )
and diag(1, ,1)  R k c k c is a diagonal matrix with ones. The zeros and diagonal matrix
follow from the fact that all standard distributions are independently distributed without any
correlations with the other parameters.
The Jacobians can be calculated as

  (z | )  1
k wk  k  k k k   k  k ,
  c ( zc |  c )   c
  (z |  )   w
c wk  c  k k k    k2 c  c   k c  c ,
  c ( zc |  c )  c c
(14)
  (z |  )  1
 zk wk  c  k k k    zk  k ,
  c ( zc |  c )   c
  (z |  )   w
 zc wk  c  k k k    k2  zc  c   k  zc  c .
  c ( zc |  c )  c c

In other words, we can rewrite formula (13) as

   k  k 
T
  k  k  
    
D  1   wk c  c    kc 0   wk  c  c  
wˆ k ( zk , zc )  N  wk , 2    .
 c   zk  k   0 diag(1, ,1)   zk  k  
(15)
  
   wk  z  c    wk  z  c  
  c   c 

In the special case of having both fixed (non-random) coefficients, k  k  c  c  1 and
 zk  k   zc  c  0, such that the variance simplifies to the Eqn. (8). The asymptotic
ˆ k ( zk , zc ). The (unconditional)
distribution in (15) is for the conditional parameter estimate w
expected WTP estimate, denoted by ŵk (without being conditional to specific draws ( zk , zc ) ),
is defined as

wˆ k    wˆ ( z , z )dF ( z )dF ( z ),
z k zc
k k c k k c c (16)

where Fk ( zk ) and Fc ( zc ) are the (possibly multivariate) cumulative distribution functions of

the standard distributed zk and zk . Since the integrals are linear operators, the resulting
asymptotic distribution of ŵk is also normally distributed, where the expectation and the
ˆ k ( zk , zc ) defined in Eqn. (15). Theoretically, this leads to a
variance are integrals over w
problem, as for unbounded distributions (like the normal distribution that is defined on the

7
Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

complete domain of ( , ) ) these integrals will not be defined at  c  0. That the moments
of the distribution are undefined, does not mean that the distribution does not exist. Daly et al.
(2012b) show that the probability of observing  c  0 should be zero in order for the moments
to be finite. Hence, they suggest that the cost parameter should not follow a normal distribution
or a distribution truncated at zero, but rather a lognormal distribution or another distribution
with no probability mass at  c  0. Alternatively, one could use the median to replace the
mean. In the remainder of this paper we will assume that the probability distribution of the cost
parameter has no mass at  c  0 or that the median replaces the mean in case there is a positive
mass around zero.
The unconditional mean WTP estimate ŵk can be approximated by Monte Carlo simulation,

1 R
wˆ k   wˆ k ( zk( r ) , zc( r ) ),
R r 1
(17)

where ( zk( r ) , zc( r ) ), r  1,, R, are pseudo-random or quasi-random draws from the
distributions defined by Fk ( zk ) and Fc ( zc ). The larger R is, the more accurate the
approximation will be. Since wˆ k ( z k( r ) , zc( r ) ) is asymptotically normally distributed, ŵk will also
be normally distributed in the limit, with the following simulated variance:

  k  k( r ) 
T
 k  k( r )  
  (r )   (r ) 
R     wk c  c  
1   wk c  c   kc
(r ) (r )
1 0
var( wˆ k )         , (18)
R r 1    ( r ) 2   zk  k( r )   0 diag(1, ,1)    zk  k( r )  
   w( r )  ( r )  
c

   w( r )   ( r ) 
  k zc c   k zc c  

where  k( r )   k ( z k( r ) , zc( r ) ),  c( r )   c ( zk( r ) , zc( r ) ), and wk( r )   k( r ) /  c( r ) . The draws ( zk( r ) , zc( r ) )
can be obtained using for example Halton draws (e.g., Bhat, 2001) or other quasi-random draws
(e.g., Sándor and Train, 2004; Bliemer et al., 2008) (k( r ) , c( r ) ) such that the zk( r )  Fk1 (k( r ) )
and zc( r )  Fc1 (c( r ) ).

Once the asymptotic variance in Equation (18) has been calculated, the (1   ) confidence
interval of the expected WTP estimate can be determined as

 wˆ  t
k 1 / 2 var( wˆ k ), wˆ k  t1 / 2 var( wˆ k ) ,  (19)

where t is the t-value corresponding to a level of significance of  . For example, for a 95

percent confidence interval, t0.975  1.96.

It is important to realize that the variance of the unconditional WTP computed directly from the
conditional WTP’s, considering only simulated values of wk ( z k( r ) , zc( r ) ), is incorrect as it ignores
the uncertainty (expressed in the variance-covariance matrix) of the distributional parameter
estimates, ˆ, while we explicitly take this into account in Eqn. (18).

4.2. Case II: Dependently distributed random parameters

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

Estimation of dependent random parameters is typically limited to the multivariate normal

distribution, as for other distributions or mixtures of distributions the multivariate distribution
are not easy to estimate or can only be approximated. In this section, we restrict ourselves to the
ratio of two dependent normally or lognormally distributed parameters.
Consider a vector of parameters,  , which are assumed normally distributed with a vector of
means,  , and a matrix of (co)variances, ,

  N  , . (20)

Non-zero covariances mean that the parameters are correlated (dependent). In order to estimate
these variances and covariances, a Cholesky decomposition can be used in which the vector of
dependent normally distributed parameters,  , is written a linear combination of a vector of
independent standard normally distributed parameters, z,

    Az , (21)

where A is a lower triangular (Cholesky) matrix such that AAT   (see e.g., Greene, 2008).
The values in the A matrix are then estimated, and using these values the matrix with estimated
(co)variances can be obtained. Writing Eqn. (21) in extensive form, this becomes

 1   1   a11 0  0  z1   1  a11 z1 
        
  2    2    a21 a22  0  z2   2  a21 z1  a22 z2 
 . (22)
                
        
  K    K   aK 1 aK 2  aKK  zK    K  aK 1 z1    aKK z K 

This means that each single parameter can be written as

k
 k   k   aki zi . (23)
i 1

An important difference with the case of independent normally distributed parameters is, that
 k no longer just depends on only zk , but on z1 ,, zk . The Kth random parameter,  K ,
depends on K  1 distributional parameters,  K  (  K , aK 1 , , aKK ). Hence, the vector of all
parameters that need to be estimated can be denoted by    k k 1,, K . Estimation of this
vector produces not only the parameter estimates, ˆ, but also yields an asymptotic variance-
covariance matrix,  . As indicated before, the square roots of the diagonal elements of this
matrix denote the standard errors describing the uncertainty of each element in the vector of
parameter estimates.
Computing the variance of the unconditional WTP requires again simulation. It is clear that the
ranking order in which the parameters are represented in the Cholesky matrix determines the
number of distributions that needs to be drawn from when computing the WTP. If wk   k /  c
is of main interest, then it is best to use  k and  c as the first two parameters, requiring only
two standard normal distributions to be drawn from. If such an ordering is not made in advance,
then in theory one may need to draw from all K standard normal distributions. Larger numbers
of draws, R, are then required to obtain a good approximation of the expected WTP and its
asymptotic variance.

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Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

In order to determine the asymptotic distribution of the estimated conditional WTP,

wˆ k ( zk , zc ), again Eqn. (13) can be used. Assuming that  k and  c as the first two
parameters, the Jacobians for the WTP are given by

1
1 1 w   1
k wk    , c wc   k  zk  ,  zk wk   (a11  a21wk ), and
 c  zk  c z  c
 c (24)
a22 wk
 zc wc   .
c

Now assume that all coefficients are lognormally distributed in which the underlying normal
distribution has a vector of means,  , and a matrix of (co)variances, . Eqn. (23) then
becomes

 k

 k  exp  k   aki zi  , (25)
 i 1 
such that the Jacobians are

1
1  
k wk  wk   , c wc   wk  zk  ,  zk wk  ( a11  a21 ) wk , and  zc wc   a22 wk . (26)
 zk  z 
 c

It is possible to mix normal and lognormal distributions, hence  k can be normally distributed
and  c lognormally with a joint matrix of (co)variances of the underlying normal distribution,
.

5. Examples
In this section we will provide a few numerical examples, illustrating the computation of the
confidence intervals of the willingness-to-pay under different distributional assumptions of the
parameter estimates. We use an empirical data set collected in a simple route choice experiment,
where respondents had to choose between their current route, and two hypothetical route
alternatives that included a tolled route. The routes were identified by four travel times
described as the time spent in free flow and congested travel conditions travelling on non-tolled
road during the trip, and free flow and congested travel conditions travelling on a toll road
during the trip, as well as the toll and petrol costs, and the number of traffic lights (see Figure
1). For the current study, we combine the free flow and time spent in congested traffic
conditions for both road types to form combined travel times non-tolled, and tolled roads, and
use only the toll cost and the number of traffic lights.

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

Figure 1: Screen capture of stated choice task

Data were collected in October 2011 from 148 respondents, each of whom completed 12 choice
tasks each. As such, the data consists of 1776 choice observations. Respondents were recruited
from an internet panel ([Link] and were required to have recently
taken a commuting trip in Sydney Australia.
For illustration purposes, we will focus on the willingness-to-pay for a reduction in the travel
time of the non-tolled route (TUR), i.e., wTUR  TUR / TC . In four different examples, we will
assume the following combinations of distributions for the two parameters: (i) normally
distributed travel time parameter, fixed cost parameter, (ii) both parameters independently
normally distributed, (iii) both parameters dependently normally distributed, and (iv) fixed

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

travel time parameter, lognormally distributed cost parameter. Table 2 summarizes the different
parameter estimates that are used to illustrate these willingness-to-pay computations for RCL
models. The parameter estimates used in the four examples are shaded in grey. Note that the
standard deviations of the random parameters are fairly large, such that we would expect
relatively wide confidence intervals for the WTP estimates.

Table 2: Parameter estimates of four examples

Example 1 Example 2 Example 3 Example 4

Attribute  (t-ratio)  (t-ratio)  (t-ratio)  (t-ratio)
Con1 -0.86424 (-9.87) -2.07409 (-13.33) -2.16449 (-12.83) -0.73291 (-11.30)
Con2 0.30547 (4.48) 0.25094 (3.28) 0.23754 (3.12) 0.23771 (4.07)
Travel time UR Mu -0.04694 (-4.76) -0.02895 (-3.27) -0.02586 (-2.54) -0.03470 (-10.77)
Sigma 0.06611 (5.52) 0.05111 (4.33) -- (4.37) -- --
Travel time TR Mu -0.25723 (-7.47) -0.01952 (-1.58) -0.05938 (-2.79) -0.01284 (-2.49)
Sigma 0.86313 (48.02) 0.07005 (2.62) -- (2.38) -- --
Traffic Lights Mu -0.20925 (-7.87) -0.07167 (-2.38) 0.02272 (0.49) -0.12124 (-5.18)
Sigma 0.05230 (0.85) 0.14364 (2.89) -- (3.44) -- --
Toll Costs Mu -0.50606 (-24.38) -0.95054 (-9.51) -0.81403 (-9.94) -0.99440 (-7.06)
Sigma -- -- 0.91316 (10.46) -- (7.76) 1.22291 (26.35)
Cholesky Sigma TUR:TUR -- -- -- -- 0.05780 (4.37) -- --
TTR:TTR -- -- -- -- 0.06466 (1.71) -- --
TL:TL -- -- -- -- 0.09822 (1.52) -- --
TC:TC -- -- -- -- 0.74988 (7.66) -- --
TTR:TUR -- -- -- -- 0.01751 (0.36) -- --
TL:TUR -- -- -- -- -0.11592 (-1.92) -- --
TL:TTR -- -- -- -- -0.01686 (-0.23) -- --
TC:TUR -- -- -- -- 0.01824 (0.14) -- --
TC:TTR -- -- -- -- 0.06003 (2.26) -- --
TC:TL -- -- -- -- -0.15613 (-2.59) -- --
Log-likelihood -1377 -1295 -1285 -1319
Adj.  2 0.29 0.33 0.34 0.32

5.1. Normal divided by fixed

Assume that  k is a random parameter following a normal distribution, hence  k  k   k zk
with zk  N (0,1), and that  c is a fixed parameter. The Jacobians are ( k , k )  k  (1, zk ) ,
T

 c  c  1, and  zk  k   k , respectively, such that the conditional WTP is asymptotically

distributed as

  1 
T
 1 
   
D
 1  zk   ( k , k , c ) 0   zk  
wˆ k ( zk )  N  wk ( zk ), 2    ,
1    wk ( zk )  
(27)
 c   wk ( zk )   0
    
  k    k  


with the subset of the covariance matrix taken directly from the estimation software,

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

 var( k ) cov( k ,  k ) cov( k ,  c )   0.00010 0.00000 0.00005

  
( k , k , c )   cov( k ,  k ) var( k ) cov( k ,  c )    0.00000 0.00014 0.0001
 cov(  ,  ) cov( ,  ) var(  c )   0.00005 0.00011 0.00043
 k c k c

Using 25,000 Halton draws for simulating the standard normally distributed variable zk , the
average WTP can be computed as 0.0928, and the average variance is 0.0179, such that the
average standard error is 0.1138. Hence, the 95 percent confidence interval is (-0.1694, 0.3550).
To graphically illustrate, with each Halton draw we obtain a WTP value and a variance of the
WTP. Hence, each draw represents a normal distribution of the WTP. In Figure 2 we have
plotted (in blue) 50 normal distributions obtained from the first 50 Halton draws. The sampling
distribution is then determined by taking the mean WTP and the mean variance, represented by
the thick solid line (in red) in Figure 1.

Pr(wk )
3.5

2.5

1.5

0.5

0 wk
-0.6 -0.4 -0.2 0 0.2 0.4 0.6 0.8

Figure 2: Simulated normal distributions and the sampling distribution (Normal / Fixed)

We also compare the results using the (Krinsky and Robb) simulation procedure for random
coefficients logit models, as outlined by Hensher and Greene (2003). Obtaining the lower
triangular Cholesky matrix from the covariance matrix, which is then used to simulate k ,  k ,
and  c using 25,000 Halton draws, and obtaining  k by simulating zk (hence, a simulation
over four dimensions in total), we find a mean WTP of 0.0943 and a variance of 0.0175. Taking
the 0.025 and 0.975 percentiles results in a confidence interval of (-0.1674, 0.3587). Hence, the
Delta method reproduces the confidence intervals found by applying the Krinsky and Robb
method, but instead requiring integration over only a single random variables instead of over
four dimensions.

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Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

5.2. Normal divided by normal

Now assume that both  k and  c are random parameters following a normal distribution,
hence  k  k   k zk with zk  N (0,1), and  c  c   c zc , with zc  N (0,1). Then the
Jacobians are ( k , k )  k  (1, zk ) ,  ( c , c )  c  (1, zc )T ,  zk  k   k , and  zc  c   c ,
T

respectively, such that the conditional WTP is asymptotically distributed as

  1 
T
 1
   
  zk    (  , ,  , ) 0 0
zk
D  1   w ( z , z )   k k c c
   wk ( zk , z

wˆ k ( zk , zc )  N wk ( zk , zc ), 2 
k k c
 1 0
 c ( zc )   wk ( zk , zc ) zc  
0 (28
    wk ( zk , z )
    
0 0 1
 k
  k
 
   wk ( zk , zc ) c    wk ( zk , zc


with
 0.00008 0.00002 0.00007 0.00001 
 
0.00002 0.00014 0.00001 0.00007 
( k , k , c , c )  .
 0.00007 0.00001 0.00999 0.00463 
 
 0.00001 0.00007 0.00463 0.00762 

First of all, we note that having the cost parameter normally distributed is problematic, as stated
in Daly et al. (2012b), as a normal distribution has a positive probability mass at zero and
therefore draws close to zero lead to very large WTP values. Hence, theoretically the mean and
variance of the WTP are undefined. Again using 25,000 Halton draws, we therefore take the
median of the WTPs and the median of the variances of the WTP. The median WTP is 0.0190
and the median variance is 0.0029, such that the median standard error is 0.0542. Hence, the 95
percent confidence interval based on the median values is (-0.0873, 0.1253). For completeness,
we also computed the average WTP and average variance, yielding -0.0312 and
1656835850.8956, respectively, leading to a not very meaningful 95 percent confidence interval
of (-79778.8924, 79778.8500).

5.3. Normal divided by normal (dependent)

Similar to the previous example, we assume that both  k and  c are random parameters
following a normal distribution, however, this time we assume they are dependent such that the
covariances are also estimated. We describe the parameters as a function of the first three
elements in the Cholesky matrix, namely (a11 , a21 , a22 ), which yields  k  k  a11 zk and
 c  c  a21 zk  a22 zc , with zk  N (0,1) and zc  N (0,1). Hence, the conditional WTP is
asymptotically distributed as

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

  1 
T

  
  zk 
   wk ( zk , zc ) 
D  1  
wˆ k ( zk , zc )  N  wk ( zk , zc ), 2   wk ( zk , zc ) zk  
  c ( z k , zc ) 
  wk ( zk , zc ) zc 
 
  a11  a21wk ( zk , zc ) 
  a w ( z , z ) 
  
 22 k k c
(29)
 1 
 
 zk 
 ( k , a11 , c , a21 ,a22 ) 0 0    wk ( zk , zc )  
  
 0 1 0    wk ( zk , zc ) zk   ,

 0 0 1    wk ( zk , zc ) zc  
 
 a11  a21wk ( zk , zc )  
 a w ( z , z )  
 22 k k c 

with
 0.00010 0.00000 0.00011 0.00058 0.00026 
 
 0.00000 0.00018 0.00011 0.00013 0.00011 
( k , a11 , c , a21 ,a22 )   0.00011 0.00011 0.00671 0.00008 0.00381  .
 
 0.00058 0.00013 0.00008 0.01626 0.00459 
 0.00026 0.00011 0.00381 0.00459 0.00957 
 

As in the previous example, a normally distributed parameter in the denominator is problematic

and the WTP moments are undefined. Hence, the only meaningful results we can state are based
on the median values. The median WTP is 0.0211, and the median variance is 0.0081, such that
the median standard error is 0.0898 and the 95 percent confidence interval is (-0.1549, 0.1972).

5.4. Fixed divided by lognormal

In the fourth and final example, we consider a fixed parameter for  k and a randomly
distributed cost parameter following a lognormal distribution, hence  c  exp( c   c zc ) with
zc  N (0,1). The Jacobians are  (  k )  k  1, ( c , c )  c  (  c , zc  c )T , and  zc  c   c  c ,
respectively, such that the conditional WTP is asymptotically distributed as

  1 
T
 1 
   
D
 1   wk ( zk , zc )  c ( zc )   ( k , c , c ) 0    wk ( zk , zc )  c ( zc )  
wk ( zc )  N  wk ( zk , zc ), 2
ˆ    .
1    wk ( zk , zc ) zc  c ( zc )  
(30)
 c ( zc )   wk ( zk , zc ) zc  c ( zc )   0
    
   c  k ( zk )    c  k ( zk )  

with

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Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

 0.00001 0.00002 0.00001 

 
( k , c , c )   0.00002 0.01985 0.00652  .
 0.00001 0.00652 0.00215 
 

The lognormal produces always negative values for the cost parameter, hence the mean and
variance of the WTP are computable and meaningful. The mean WTP is 0.1959 with a mean
variance of 0.2213, such that the mean standard error is 0.4704, yielding a 95 percent
confidence interval of (-0.7261, 1.1179). If we would again take the median instead of the mean,
we would obtain a median WTP of 0.0941 with a median standard error of 0.1161, resulting in a
confidence interval of (-0.1335, 0.3216), which is more in line with the findings from the first
example with a normally distributed random coefficient divided by a fixed coefficient. The
difference between the confidence intervals obtained through the mean and the median are quite
different, which is also illustrated in Figure 3. The red line indicates the sampling distribution
using the mean, while the green line represents the sampling distribution using the median.
Since dividing by the lognormal distribution results in some cases to rather large values for the
WTP (since values close to zero are likely to occur, although values equal to zero cannot occur),
the mean variance is large. Using the median, extreme values do not have a large impact.

Pr( wk )
5

4.5

3.5

2.5

1.5

0.5

0 wk
-0.4 -0.2 0 0.2 0.4 0.6 0.8 1

Figure 3: Simulated normal distributions and the sampling distribution (Fixed / Lognormal)

6. Discussion
In this paper we have presented a method to determine the confidence intervals of WTP
measures taken from a RCL model in which one or more of the parameters following a random
distribution. The method works by first reformulating the WTP as a function of the
distributional parameters and some parameter-free standard distributions and then applying the
Delta method. Hence, the method can be applied for any combination of normal distributions,
lognormal distributions, uniform distributions, exponential distributions, triangular distributions,

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 Confidence intervals of willingness-to-pay for random coefficient logit models.
Bliemer and Rose

and more. We have also shown that correlations between (log)normally distributed parameters
can be taken into account. The method takes the variance-covariance matrix of the respective
model parameter estimates into consideration, translating the uncertainties in the estimation of
the distributional parameters into uncertainty in the WTP measure as presented in confidence
intervals.
As Daly et al. (2012b) points out, one has to be careful that the random parameter in the
denominator (typically the cost parameter) does not go through zero. Hence, the probability
mass of this distribution should be nil at zero, such as in the lognormal distribution. Otherwise,
the mean and variance of the WTP are theoretically not defined. The parameter estimates in
Table 2 illustrate that in this example using a fixed coefficient or a lognormally distributed
coefficient for the cost parameter results in a worse model fit, although these are the only two
models presented in the table that are able to produce theoretically defined WTPs. If one would
like to select the model with the best model fit, the pragmatic way out would be to take the
median instead of the mean. The analyst is therefore confronted with a dilemma, which deserves
a closer look at the matter.
As mentioned, it is not necessary to assume linear utility functions, the methodology proposed
in this paper can also handle nonlinearities in the parameters and/or in the attributes. In that
case, the derivatives in Eqn. (6) will not be a simple ratio of  k and  c , but rather a more
general function of these parameters and possibly the attribute levels, x. Furthermore, the
Jacobians  k  k need to be replaced by a more general Jacobian  k hk (  k ), where
hk (  k )  g j / x jk . The algebra may become a bit more tedious, but the equations and the
main principle remain the same.

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